SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended February 28, 2004
Commission File Number 1-8504
UNIFIRST CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 04-2103460
(State of Incorporation) (IRS Employer Identification Number)
68 Jonspin Road
Wilmington, Massachusetts 01887
(Address of principal executive offices)(Zip Code)
Registrant's telephone number: (978) 658-8888
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ ] No [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [X] No [ ]
The number of outstanding shares of UniFirst Corporation Common Stock and Class
B Common Stock at April 6, 2004 were 9,039,604 and 10,159,144 respectively.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
UniFirst Corporation and Subsidiaries
(Unaudited)
FEBRUARY 28, AUGUST 30, MARCH 1,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2003 2003
------------------------------------- ------------ ---------- ---------
Assets
Current assets:
Cash and cash equivalents $ 12,684 $ 6,053 $ 5,350
Receivables, less reserves of $3,703, $2,611, and $3,429,
respectively 72,912 57,941 60,694
Inventories 32,764 25,355 25,208
Rental merchandise in service 63,596 60,490 56,870
Prepaid taxes and deferred tax assets 1,734 5,591 5,641
Prepaid expenses 1,385 407 307
-------- --------- ---------
Total current assets 185,075 155,837 154,070
-------- --------- ---------
Property and equipment:
Land, buildings and leasehold improvements 236,415 221,487 214,889
Machinery and equipment 258,650 238,820 237,516
Motor vehicles 68,423 66,081 65,076
-------- --------- ---------
563,488 526,388 517,481
Less - accumulated depreciation 269,476 251,806 246,433
-------- --------- ---------
294,012 274,582 271,048
-------- --------- ---------
Goodwill 181,235 62,608 62,297
Intangible assets, net 60,917 20,524 20,944
Other assets 2,003 1,036 1,498
-------- --------- ---------
$723,242 $ 514,587 $ 509,857
======== ========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Current maturities of long-term obligations $ 1,442 $ 2,493 $ 3,049
Notes payable -- 104 1,350
Accounts payable 30,859 30,678 34,364
Accrued liabilities 72,801 53,670 56,370
Accrued income taxes 448 -- --
-------- --------- ---------
Total current liabilities 105,550 86,945 95,133
-------- --------- ---------
Long-term obligations, net of current maturities 232,404 67,319 73,932
Deferred income taxes 33,855 24,943 23,243
-------- --------- ---------
Shareholders' equity:
Preferred stock, $1.00 par value; 2,000,000 shares authorized;
none issued -- -- --
Common stock, $.10 par value; 30,000,000 shares
authorized; shares issued 10,630,609, 10,599,359, and
10,558,309, respectively 1,063 1,060 1,055
Class B common stock, $.10 par value; 20,000,000 shares authorized;
issued and outstanding 10,160,144, 10,175,144, and
10,205,144, respectively 1,016 1,018 1,021
Treasury stock, 1,595,055 shares, at cost
(26,005) (26,005) (26,005)
Capital surplus 12,926 12,693 12,546
Retained earnings 362,871 348,043 332,505
Accumulated other comprehensive loss (438) (1,429) (3,573)
-------- --------- ---------
Total shareholders' equity 351,433 335,380 317,549
-------- --------- ---------
$723,242 $ 514,587 $ 509,857
======== ========= =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
2
Condensed Consolidated Statements of Income
UniFirst Corporation and Subsidiaries
(Unaudited)
Twenty-Six Twenty-Six Thirteen Thirteen
weeks ended weeks ended weeks ended weeks ended
February 28, March 1, February 28, March 1,
(In thousands, except per share data) 2004 2003 2004 2003
------------------------------------- ----------- ----------- ----------- -----------
Revenues $ 358,305 $ 295,604 $ 177,407 $ 146,425
--------- --------- --------- ---------
Cost and expenses:
Operating costs 230,801 191,141 115,713 98,451
Selling and administrative expenses 73,861 63,550 37,034 31,651
Depreciation and amortization 22,727 19,688 11,699 9,804
--------- --------- --------- ---------
327,389 274,379 164,446 139,906
--------- --------- --------- ---------
Income from operations 30,916 21,225 12,961 6,519
--------- --------- --------- ---------
Other expense (income):
Interest expense 6,244 2,192 3,002 1,098
Interest income (631) (833) (339) (565)
Interest rate swap income (900) (360) (420) (151)
--------- --------- --------- ---------
4,713 999 2,243 382
--------- --------- --------- ---------
Income before income taxes 26,203 20,226 10,718 6,137
Provision for income taxes 10,088 7,787 4,126 2,363
--------- --------- --------- ---------
Income before cumulative effect of accounting change 16,115 12,439 6,592 3,774
Cumulative effect of accounting change (net of income tax
benefit of $1,404 in fiscal 2003) -- 2,242 -- --
--------- --------- --------- ---------
Net income $ 16,115 $ 10,197 $ 6,592 $ 3,774
========= ========= ========= =========
Weighted average number of shares outstanding : basic 19,187 19,193 19,190 19,168
========= ========= ========= =========
Weighted average number of shares outstanding : diluted 19,249 19,240 19,253 19,208
========= ========= ========= =========
Income per share - basic:
Before cumulative effect of accounting change, net $ 0.84 $ 0.65 $ 0.34 $ 0.20
Cumulative effect of accounting change, net -- (0.12) -- --
--------- --------- --------- ---------
Net income per share $ 0.84 $ 0.53 $ 0.34 $ 0.20
========= ========= ========= =========
Income per share - diluted:
Before cumulative effect of accounting change, net $ 0.84 $ 0.65 $ 0.34 $ 0.20
Cumulative effect of accounting change, net -- (0.12) -- --
--------- --------- --------- ---------
Net income per share $ 0.84 $ 0.53 $ 0.34 $ 0.20
========= ========= ========= =========
Cash dividends per share:
Common stock $ 0.0750 $ 0.0750 $ 0.0375 $ 0.0375
========= ========= ========= =========
Class B common stock $ 0.0600 $ 0.0600 $ 0.0300 $ 0.0300
========= ========= ========= =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
Condensed Consolidated Statements of Cash Flows
UniFirst Corporation and Subsidiaries
(Unaudited)
Twenty-Six Twenty-Six
weeks ended weeks ended
February 28, March 1,
(In thousands) 2004 2003
- ------------------------------------------------------------ ------------ ------------
Cash flows from operating activities:
Net income $ 16,115 $ 10,197
Adjustments:
Cumulative effect of accounting change, net -- 2,242
Depreciation 19,484 17,297
Amortization of intangible assets 3,243 2,391
Amortization of deferred financing costs 580 --
Accretion on asset retirement obligations 193 145
Interest rate swap income (900) (360)
Changes in assets and liabilities, net of acquisitions:
Receivables (5,456) (6,107)
Inventories 1,855 (401)
Rental merchandise in service 7,181 (823)
Prepaid expenses 77 7
Accounts payable (4,550) 17,352
Accrued liabilities 3,736 (1,314)
Accrued income taxes 2,332 (9,454)
-------- --------
Net cash provided by operating activities 43,890 31,172
-------- --------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (178,940) --
Capital expenditures (15,676) (18,427)
Other (36) (1,275)
-------- --------
Net cash used in investing activities (194,652) (19,702)
-------- --------
Cash flows from financing activities:
Increase in debt 176,603 854
Reduction of debt (14,679) (8,814)
Deferred financing costs (3,478) --
Repurchase of common stock -- (1,249)
Proceeds from exercise of common stock options 234 43
Cash dividends (1,287) (1,287)
-------- --------
Net cash provided by (used in) financing activities 157,393 (10,453)
-------- --------
Net increase in cash and cash equivalents 6,631 1,017
Cash and cash equivalents at beginning of year 6,053 4,333
-------- --------
Cash and cash equivalents at end of period $ 12,684 $ 5,350
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
UniFirst Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Twenty-Six Weeks Ended February 28, 2004
(Amounts in thousands, except per share and common stock options data)
1. Summary Of Critical and Significant Accounting Policies
Business Description
UniFirst Corporation (the "Company") is a leading company in the garment service
business. The Company designs, manufactures, personalizes, rents, cleans,
delivers and sells a variety of superior quality occupational garments, career
apparel and imagewear programs to businesses of all kinds. We also service
industrial wiper towels, floor mats and other non-garment items and provides
first aid cabinet services and other safety supplies. The Company's UniTech
subsidiary decontaminates and cleans, in separate facilities, garments which may
have been exposed to radioactive materials.
Interim Financial Information
These condensed consolidated financial statements have been prepared by the
Company without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations; however, the Company believes that the information furnished
reflects all adjustments (consisting only of normal recurring adjustments) which
are, in the opinion of management, necessary to a fair statement of results for
the interim period. It is suggested that these condensed consolidated financial
statements be read in conjunction with the financial statements and the notes,
thereto, included in the Company's latest annual report on Form 10-K. Results
for an interim period are not indicative of any future interim periods or for an
entire fiscal year.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned. Intercompany balances and
transactions are eliminated in consolidation. All assets and liabilities of
foreign subsidiaries are translated into U.S. dollars using the exchange rate
prevailing at the balance sheet date, while income and expense accounts are
translated at average exchange rates during the year.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates. There have
been no changes in judgments or the method of determining estimates that had a
material effect on our condensed consolidated financial statements for the
periods presented.
Fiscal Year
The Company's fiscal year ends on the last Saturday in August. For financial
reporting purposes, fiscal 2004 will have 52 weeks, as did fiscal 2003.
Revenue Recognition and Allowance for Doubtful Accounts
The Company recognizes revenue from rental operations in the period in which the
services are provided. Direct sale revenue is recognized in the period in which
the product is shipped. Judgments and estimates are used in determining the
collectability of accounts receivable. The Company analyzes specific accounts
receivable and historical bad debt experience, customer credit worthiness,
current economic trends and the age of outstanding balances when evaluating the
adequacy of the allowance for doubtful accounts. Management judgments and
estimates are used in connection with establishing the allowance in any
accounting period. Changes in estimates are reflected in the period they become
known. If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. Material differences
5
may result in the amount and timing of bad debt expense recognition for any
given period if management makes different judgments or utilizes different
estimates.
Inventories and Rental Merchandise in Service
Inventories are stated at the lower of cost or market value, net of any reserve
for excess and obsolete inventory. Judgments and estimates are used in
determining the likelihood that new goods on hand can be sold to customers or
used in rental operations. Historical inventory usage and current revenue trends
are considered in estimating both excess and obsolete inventories. If actual
product demand and market conditions are less favorable than those projected by
management, additional inventory write-downs may be required. The Company uses
the last-in, first-out (LIFO) method to value a significant portion of its
inventories. Had the Company used the first-in, first-out (FIFO) accounting
method, inventories would have been approximately $1.5 million higher at
February 28, 2004, August 30, 2003 and March 1, 2003. Substantially all
inventories represent finished goods.
Rental merchandise in service is being amortized on a straight-line basis over
the estimated service lives of the merchandise, which range from 6 to 24 months.
In establishing estimated lives for merchandise in service, management considers
historical experience and the intended use of the merchandise. Material
differences may result in the amount and timing of operating profit for any
period if management makes different judgments or utilizes different estimates.
Property and Equipment
Property and equipment are recorded at cost. The Company provides for
depreciation on the straight-line method based on the following estimated useful
lives:
Buildings 30-40 years
Leasehold improvements Term of lease
Machinery and equipment 3-10 years
Motor vehicles 3-5 years
Expenditures for maintenance and repairs are expensed as incurred. Expenditures
for renewals and betterments are capitalized.
Goodwill and Other Intangible Assets
Customer contracts are amortized over their estimated useful lives which have a
weighted average life of approximately 15 years. Restrictive covenants are
amortized over the terms of the respective non-competition agreements, which
have a weighted average life of approximately 7.5 years. In accordance with the
provisions of Statement of Financial Accounting Standards "SFAS" No. 142, the
Company does not amortize goodwill.
Income Taxes
The Company's policy of accounting for income taxes is in accordance with SFAS
No. 109 - "Accounting for Income Taxes". Deferred income taxes are provided for
temporary differences between amounts recognized for income tax and financial
reporting purposes at currently enacted tax rates. The Company computes income
tax expense by jurisdiction based on its operations in each jurisdiction.
The Company is periodically reviewed by domestic and foreign tax authorities
regarding the amount of taxes due. These reviews include questions regarding the
timing and amount of deductions and the allocation of income among various tax
jurisdictions. In evaluating the exposure associated with various filing
positions, the Company records estimated reserves for probable exposures. Based
on the Company's evaluation of current tax positions, the Company believes they
have appropriately accrued for probable exposures.
6
Net Income Per Share
Basic and diluted net income per share is calculated using the weighted average
number of common and dilutive potential common shares outstanding during the
year. The following table illustrates the amounts used in the denominator of the
calculation:
Twenty-Six Twenty-Six Thirteen Thirteen
weeks ended weeks ended weeks ended weeks ended
February 28, March 1, February 28, March 1,
2004 2003 2004 2003
------------ ----------- ------------ -----------
Weighted average number of shares outstanding:
basic 19,187 19,193 19,190 19,168
Add: effect of dilutive potential common shares -
employee common stock options 62 47 63 40
------ ------ ------ ------
Weighted average number of shares outstanding:
diluted 19,249 19,240 19,253 19,208
------ ------ ------ ------
Stock Based Compensation
The Company accounts for its stock-based compensation plan under the recognition
and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued
to Employees" and related Interpretations. The Comapny adopted the
disclosure-only provisions of Statement of Financial Accounting Standards No.
148, "Accounting for Stock-Based Compensation Transition and Disclosure", an
amendment of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," ("Statement No. 123"). Therefore, no stock-based
employee compensation cost is reflected in net income, as all options granted
under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of Statement No. 123 to stock-based employee
compensation (in thousands, except per share data).
Twenty-Six Twenty-Six Thirteen Thirteen
weeks ended weeks ended weeks ended weeks ended
February 28, March 1, February 28, March 1,
2004 2003 2004 2003
------------- --------- ----------- -----------
Income before cumulative effect of accounting change $ 16,115 $ 12,439 $ 6,592 $ 3,774
Less: pro forma compensation expense, net of tax (108) (79) (60) (46)
------------- --------- ----------- ----------
Pro forma income before cumulative effect of accounting change 16,007 12,360 6,532 3,728
Cumulative effect of accounting change, net of tax -- (2,242) -- --
------------- --------- ----------- ----------
Pro forma net income $ 16,007 $ 10,118 $ 6,532 $ 3,728
============= ========= =========== ==========
Basic net income per weighted average common share, as reported:
Income before cumulative effect of accounting change $ 0.84 $ 0.65 $ 0.34 $ 0.20
Cumulative effect of accounting change, net of tax -- (0.12) -- --
------------- --------- ----------- ----------
Net income per share $ 0.84 $ 0.53 $ 0.34 $ 0.20
Basic net income per weighted average common share, pro forma:
Pro forma income before cumulative effect of accounting change $ 0.83 $ 0.64 $ 0.34 $ 0.19
Cumulative effect of accounting change, net of tax -- (0.12) -- --
------------- --------- ----------- ----------
Pro forma net income per share $ 0.83 $ 0.52 $ 0.34 $ 0.19
============= ========= =========== ==========
Diluted net income per weighted average common share, as reported:
Income before cumulative effect of accounting change $ 0.84 $ 0.65 $ 0.34 $ 0.20
Cumulative effect of accounting change, net of tax -- (0.12) -- --
------------- --------- ----------- ----------
Net income per share $ 0.84 $ 0.53 $ 0.34 $ 0.20
============= ========= =========== ==========
Diluted net income per weighted average common share, pro forma:
Pro forma income before cumulative effect of accounting change $ 0.83 $ 0.64 $ 0.34 $ 0.19
Cumulative effect of accounting change, net of tax -- (0.12) -- --
------------- --------- ----------- ----------
Pro forma net income per share $ 0.83 $ 0.52 $ 0.34 $ 0.19
============= ========= =========== ==========
7
Cash and Cash Equivalents
Cash and cash equivalents include cash in banks and bank short-term investments
with maturities of less than ninety days.
Financial Instruments
The Company's financial instruments, which may expose the Company to
concentrations of credit risk, include cash and cash equivalents, receivables,
accounts payable, notes payable and long-term obligations. Each of these
financial instruments is recorded at cost, which approximates its fair value.
Insurance
The Company self-insures for certain obligations related to health, workers'
compensation, vehicles and general liability programs. The Company also
purchases stop-loss insurance policies to protect it from catastrophic losses.
Judgments and estimates are used in determining the potential value associated
with reported claims and for losses that have occurred, but have not been
reported. The Company's estimates consider historical claims experience and
other factors. The Company's liabilities are based on estimates, and, while the
Company believes that the accrual for loss is adequate, the ultimate liability
may be in excess of or less than the amounts recorded. Changes in claim
experience, the Company's ability to settle claims or other estimates and
judgments used by management could have a material impact on the amount and
timing of expense for any period.
Environmental and Other Contingencies
The Company is subject to legal proceedings and claims arising from the conduct
of their business operations, including environmental matters, personal injury,
customer contract matters, and employment claims. Accounting principles
generally accepted in the United States require that a liability for
contingencies be recorded when it is probable that a liability has occurred and
the amount of the liability can be reasonably estimated. Significant judgment is
required to determine the existence of a liability, as well as the amount to be
recorded. The Company regularly consults with attorneys and outside consultants
to ensure that all of the relevant facts and circumstances are considered,
before a contingent liability is recorded. The Company records accruals for
environmental and other contingencies based on enacted laws, regulatory orders
or decrees, the Company's estimates of costs, insurance proceeds, participation
by other parties and the timing of payments, and the input of outside
consultants and attorneys. The estimated liability for environmental
contingencies has been discounted using credit-adjusted risk-free rates of
interest that range from approximately 4.0% to 5.0% over periods ranging from
fifteen to thirty years. The estimated current costs, net of legal settlements
with insurance carriers, have been adjusted for the estimated impact of
inflation at 3% per year. Changes in enacted laws, regulatory orders or decrees,
management's estimates of costs, insurance proceeds, participation by other
parties and the timing of payments, and the input of outside consultants and
attorneys could have a material impact on the amounts recorded for environmental
and other contingent liabilities.
Reclassifications
Certain prior year amounts have been reclassified to conform with current year
presentation.
Comprehensive Income
The components of comprehensive income for the thirteen and twenty-six week
periods ended February 28, 2004 and March 1, 2003, respectively, were as
follows:
Twenty-Six Twenty-Six weeks Thirteen weeks Thirteen weeks
weeks ended ended ended ended
February 28, March 1, February 28, March 1,
2004 2003 2004 2003
------------ ---------------- --------------- --------------
Net income $ 16,115 $ 10,197 $ 6,592 $ 3,774
Other comprehensive income (loss):
Foreign currency translation adjustments 991 190 (202) 203
Change in fair value of derivative instruments, net -- (60) -- (119)
---------- ---------- --------- -------
Comprehensive income $ 17,106 $ 10,327 $ 6,390 $ 3,858
========== ========== ========= =======
8
2. Acquisitions / Revolving Senior Credit Facility
On September 2, 2003 ("Closing Date"), the Company completed its acquisition of
100% of Textilease Corporation ("Textilease"). The purchase price of
approximately $175.6 million in cash was financed as part of a new $285 million
unsecured revolving credit agreement ("Credit Agreement"), with a syndicate of
banks. The Credit Agreement, completed on the Closing Date, replaces the
Company's previous $125 million unsecured revolving credit agreement and is due
on the third anniversary of the Closing Date (September 2, 2006). Availability
of credit requires compliance with financial and other covenants, including
maximum leverage, minimum fixed charge coverage, and minimum tangible net worth,
as defined in the Credit Agreement. Textilease, headquartered in Beltsville,
Maryland, had fiscal year 2002 revenues of approximately $95 million. It
services over 25,000 uniform and textile products customers from 12 locations in
six southeastern states, and also services a wide range of large and small
first-aid service customers from additional specialized facilities. Textilease's
operating results have been included in the Company's consolidated operating
results since September 2, 2003.
The following is a summary of the Company's preliminary estimate of the
estimated fair values of the assets acquired and liabilities assumed at the date
of acquisition. The Company engaged a third party to appraise the fair value of
the acquired tangible and intangible assets. The third party has completed its
appraisal and the purchase price allocation below reflects the appraised values
of acquired tangible and intangible assets. The Company is also completing its
analysis of the fair values of the liabilities assumed in connection with the
acquisition, including certain liabilities that qualify for recognition under
Emerging Issues Task Force 95-3 "Recognition of Liabilities in connection with a
Purchase Business Combination". The Company will finalize the purchase price
allocation after it completes its analysis of assumed liabilities, and receives
other relevant information relating to the acquisition. The final purchase price
allocation may be significantly different than the Company's preliminary
estimate as presented below.
Assets:
Current assets $ 29,518
Property and equipment 23,226
Goodwill 116,308
Intangible assets subject to amortization (estimated
fifteen year weighted-average useful life): 40,060
Other assets 239
---------
Total assets acquired $ 209,351
=========
Liabilities:
Current liabilities $ 17,764
Deferred compensation 5,249
Deferred income taxes 8,705
Long-term debt 2,005
---------
Total liabilities assumed $ 33,723
---------
Net assets acquired $ 175,628
=========
At the time of acquisition, goodwill of approximately $117.5 million was
recorded. For the twenty-six weeks ended February 28, 2004, the refinement of
the Company's original estimates principally related to the Company's valuation
of acquired intangible assets resulted in a decrease in goodwill of
approximately $1.2 million. The $116.3 million of goodwill as of February 28,
2004 will be assigned to our only reportable segment, that being the design,
manufacture, rental, cleaning and delivery of occupational garments, industrial
wiper towels, floor mats and other non-garment items. None of the goodwill is
expected to be deductible for income tax purposes.
At the time of acquisition, management initiated a plan to integrate certain
Textilease facilities into existing operations. Included in the purchase price
allocation is a restructuring charge of approximately $6.5 million, which
includes approximately $3.1 million in severance-related costs for corporate and
field employees and $3.4 million in facility closing and lease cancellation
costs. Through February 28, 2004, the Company paid and charged approximately
$967,000 against this accrual for severance-related costs. The Company expects
to incur substantially all of the remaining costs within twenty-four months of
the acquisition date.
9
Supplemental Pro Forma Information
The unaudited pro forma combined condensed statements of income for the thirteen
and twenty-six weeks ended March 1, 2003 give effect to the acquisition of
Textilease and related financing as if the Textilease acquisition and the
related financing had occurred on August 31, 2002. The unaudited pro forma
combined condensed statements of income for the thirteen and twenty-six weeks
ended March 1, 2003, include the unaudited condensed consolidated statements of
income of UniFirst for the thirteen and twenty-six weeks ended March 1, 2003,
and the unaudited statements of operations of Textilease for the three and six
months ended March 31, 2003, and pro forma adjustments to reflect the Textilease
acquisition and the related financing. Textilease previously had a fiscal year
ending on December 31.
The pro forma adjustments include additional interest expense of approximately
$1,482 for the thirteen weeks ended March 1, 2003 and $2,767 for the twenty-six
weeks ended March 1, 2003, related to the debt used to finance the acquisition,
additional depreciation and amortization of approximately $733 for the thirteen
weeks ended March 1, 2003 and $1,257 for the twenty-six weeks ended March 1,
2003, related to the estimated increase to the fair value of property and
equipment and intangible assets and the related income tax effects of
approximately $889 for the thirteen weeks ended March 1, 2003 and $1,612 for the
twenty-six weeks ended March 1, 2003, respectively.
The unaudited pro forma combined condensed statements of income are not
necessarily indicative of the financial results that would have occurred if the
Textilease acquisition and the related financing had been consummated on August
31, 2002, nor are they necessarily indicative of the financial results which may
be attained in the future.
The unaudited pro forma combined condensed statements of income are based upon
available information and upon certain assumptions that UniFirst's management
believes are reasonable. The Textilease acquisition is being accounted for using
the purchase method of accounting. The allocation of the purchase price is
preliminary. Final amounts could differ from those reflected in the pro forma
statement of income, and such differences could be significant.
Thirteen Thirteen Thirteen
weeks ended weeks ended weeks ended
February 28, March 1, March 1,
2004 2003 2003
(Actual) (Actual) (Pro forma)
----------- ---------- -----------
Revenues $177,407 $146,425 $169,681
======== ======== ========
Income before
cumulative effect of accounting change $ 6,592 $ 3,774 $ 2,985
Cumulative effect of accounting
change, net of tax -- -- --
-------- -------- --------
Net income $ 6,592 $ 3,774 $ 2,985
======== ======== ========
Weighted average number of shares outstanding:
basic 19,190 19,168 19,168
======== ======== ========
Weighted average number of shares outstanding:
diluted 19,253 19,208 19,208
======== ======== ========
Income per share -basic:
Before cumulative effect of
accounting change, net $ 0.34 $ 0.20 $ 0.16
Cumulative effect of accounting
change, net -- -- --
-------- -------- --------
Net income per share $ 0.34 $ 0.20 $ 0.16
======== ======== ========
Income per share -diluted:
Before cumulative effect of
accounting change, net $ 0.34 $ 0.20 $ 0.16
Cumulative effect of accounting
change, net -- -- --
-------- -------- --------
Net income per share $ 0.34 $ 0.20 $ 0.16
======== ======== ========
10
Twenty-Six Twenty-Six Twenty-Six
weeks ended weeks ended weeks ended
February 28, March 1, March 1,
2004 2003 2003
(Actual) (Actual) (Pro forma)
------------ ----------- -----------
Revenues $358,305 $ 295,604 $ 342,082
======== =========== ===========
Income before cumulative effect of accounting
change $ 16,115 $ 12,439 $ 10,233
Cumulative effect of accounting
change, net of tax -- (2,242) (2,242)
-------- ----------- -----------
Net income $ 16,115 $ 10,197 $ 7,991
======== =========== ===========
Weighted average number of shares outstanding:
basic 19,187 19,193 19,193
======== =========== ===========
Weighted average number of shares outstanding:
diluted 19,249 19,240 19,240
======== =========== ===========
Income per share -basic:
Before cumulative effect of
accounting change, net $ 0.84 $ 0.65 $ 0.53
Cumulative effect of accounting
change, net -- (0.12) (0.12)
-------- ----------- -----------
Net income per share $ 0.84 $ 0.53 $ 0.41
======== =========== ===========
Income per share -diluted
Before cumulative effect of
accounting change, net $ 0.84 $ 0.65 $ 0.53
Cumulative effect of accounting
change, net -- (0.12) (0.12)
-------- ----------- -----------
Net income per share $ 0.84 $ 0.53 $ 0.41
======== =========== ===========
During the twenty-six weeks ended February 28, 2004, the Company also completed
two other acquisitions. The aggregate purchase price for these acquisitions was
approximately $3.3 million. The results of operations for these acquisitions are
not material to the Company's results of operations and have been included in
the Company's consolidated financial statements since their acquisition date.
Acquired entities were engaged in the rental of garments, floor mats, and other
non-garment related items.
3. Asset Retirement Obligations
Effective September 1, 2002, the Company adopted the provisions of SFAS No. 143,
"Accounting for Asset Retirement Obligations." SFAS No. 143 generally applies to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and/or the normal
operation of a long-lived asset. Under the new accounting method, the Company
now recognizes asset retirement obligations in the period in which they are
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset.
As of September 1, 2002, the Company recognized as a liability the present value
of the estimated future costs to decommission its nuclear laundry facilities in
accordance with the provisions of SFAS No. 143. The adoption of SFAS No. 143
resulted in a cumulative charge of $2.2 million, net of tax benefit of $1.4
million, related to the change in accounting principle, the recognition of a
discounted asset retirement obligation of $5.3 million, and an increase of $2.4
million to the gross carrying value of the related long-lived assets ($900,000,
net of accumulated depreciation of $1.5 million). The Company will depreciate,
on a straight-line basis, the amount added to property and equipment and
recognize accretion expense in connection with the discounted liability over the
various remaining lives which range from approximately one to thirty years.
11
The estimated liability has been based on historical experience in
decommissioning nuclear laundry facilities, estimated useful lives of the
underlying assets, external vendor estimates as to the cost to decommission
these assets in the future and federal and state regulatory requirements. The
estimated current costs have been adjusted for the estimated impact of inflation
at 3% per year. The liability has been discounted using credit-adjusted
risk-free rates that range from approximately 3.00% - 7.25% over one to thirty
years. Revisions to the liability could occur due to changes in the Company's
estimated useful lives of the underlying assets, estimated dates of
decommissioning, changes in decommissioning costs, changes in federal or state
regulatory guidance on the decommissioning of such facilities, or other changes
in estimates. Changes due to revised estimates will be recognized by increasing
or decreasing the carrying amount of the liability and the carrying amount of
the related long-lived asset.
In fiscal year 2003, the Company began decommissioning one of the nuclear
laundry facilities for which it had recognized an asset retirement obligation.
Costs incurred in connection with the decommissioning for the twenty-six weeks
ended February 28, 2004 were approximately $520. As of February 28, 2004, the
Company believes this current decommissioning project will be completed by the
end of fiscal 2004.
A reconciliation of the Company's liability for the twenty-six week period ended
February 28, 2004, is as follows:
Balance at August 30, 2003 $ 7,060
Accretion expense 193
Asset retirement costs incurred (520)
---------
Balance at February 28, 2004 $ 6,733
=========
As of February 28, 2004, the $6.7 million asset retirement obligation is
included in accrued liabilities in the accompanying condensed consolidated
balance sheet.
4. Derivative Instruments and Hedging Activities
The Company has entered into interest rate swap agreements to manage its
exposure to movements in interest rates on its variable rate debt. The Company
accounts for these agreements in accordance with SFAS No. 133, as amended,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
The swap agreements are cash flow hedges and are used to manage exposure to
interest rate movement by effectively changing the variable rate to a fixed
rate. Such instruments are matched with the underlying borrowings. SFAS No. 133
eliminates special hedge accounting if a swap agreement does not meet certain
criteria, thus requiring the Company to reflect all changes in the fair value of
the swap agreement in earnings in the period of change.
In October 1999, the Company entered into an interest rate swap agreement,
notional amount $40,000 (the "$40,000 SWAP"), maturing October 13, 2004. The
Company pays a fixed rate of 6.38% and receives a variable rate tied to the
three month LIBOR rate. As of February 28, 2004, the applicable variable rate
was 1.14%. On October 15, 2002, the bank had the option to terminate the $40,000
SWAP without further obligation to make payments to the Company. The bank did
not exercise this option. Because of the existence of this termination option,
the $40,000 SWAP did not meet the required criteria to qualify as a cash flow
hedge and use special hedge accounting, under SFAS No. 133. Accordingly, the
Company has recorded, in the interest rate swap income line item of its
consolidated statements of income, income of $420 and $151 for the thirteen
weeks ended February 28, 2004 and March 1, 2003, respectively, and income of
$900 and $360 for the twenty-six weeks ended February 28, 2004 and March 1,
2003, respectively for the changes in the fair value of $40,000 SWAP.
In June 2001, the Company entered into a second interest rate swap agreement
with a notional amount of $20,000 (the "$20,000 SWAP"), maturing June 5, 2003.
The Company paid a fixed rate of 4.69% and received a variable rate tied to the
three month LIBOR rate. At maturity, the applicable variable rate was 1.34%. The
$20,000 SWAP met the required criteria as defined in SFAS No. 133 to use special
hedge accounting. Accordingly, the Company has recorded, through the accumulated
other comprehensive loss section of shareholders' equity, expense of $60, net of
tax of $38 for the twenty-six weeks ended March 1, 2003 and expense of $119, net
of tax of $74 for the thirteen weeks ended March 1, 2003. Since the $20,000 SWAP
matured on June 5, 2003, there was no change in fair value in the $20,000 SWAP
recorded in the twenty-six ended February 28, 2004.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE TWENTY-SIX WEEKS ENDED FEBRUARY 28, 2004
Overview
UniFirst Corporation (the "Company") is one of the largest providers of
workplace uniforms and protective clothing in the United States. The Company
designs, manufactures, rents, cleans, delivers, and sells a wide range of
uniforms and protective clothing, including shirts, pants, jackets, coveralls,
jumpsuits, lab coats, smocks and aprons, and also rents industrial wiping
products, floormats and other non-garment items, to a variety of manufacturers,
retailers and service companies. The Company serves businesses of all sizes in
numerous industry categories. Typical customers include automobile service
centers and dealers, delivery services, food and general merchandise retailers,
food processors and service operations, light manufacturers, maintenance
facilities, restaurants, service companies, soft and durable goods wholesalers,
transportation companies, and others who require employee clothing for image,
identification, protection or utility purposes. At certain specialized
facilities, the Company also decontaminates and cleans work clothes that may
have been exposed to radioactive materials and services special cleanroom
protective wear. Typical customers for these specialized services include
government agencies, research and development laboratories, high technology
companies and utilities operating nuclear reactors.
Critical Accounting Policies and Estimates
The Company believes the following critical accounting policies reflect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates. There have
been no changes in judgments or estimates that had a material effect on our
condensed consolidated financial statements for the periods presented.
Revenue Recognition and Allowance for Doubtful Accounts
The Company recognizes revenue from rental operations in the period in which the
services are provided. Direct sale revenue is recognized in the period in which
the product is shipped. Judgments and estimates are used in determining the
collectability of accounts receivable. The Company analyzes specific accounts
receivable and historical bad debt experience, customer credit worthiness,
current economic trends and the age of outstanding balances when evaluating the
adequacy of the allowance for doubtful accounts. Management judgments and
estimates are used in connection with establishing the allowance in any
accounting period. Changes in estimates are reflected in the period they become
known. If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. Material differences may result in the
amount and timing of bad debt expense recognition for any given period if
management makes different judgments or utilizes different estimates.
Inventories and Rental Merchandise in Service
Inventories are stated at the lower of cost or market value, net of any reserve
for excess and obsolete inventory. Judgments and estimates are used in
determining the likelihood that new goods on hand can be sold to customers or
used in rental operations. Historical inventory usage and current revenue trends
are considered in estimating both excess and obsolete inventories. If actual
product demand and market conditions are less favorable than those projected by
management, additional inventory write-downs may be required. The Company uses
the last-in, first-out (LIFO) method to value a significant portion of its
inventories. Substantially all inventories represent finished goods.
Rental merchandise in service is being amortized on a straight-line basis over
the estimated service lives of the merchandise, which range from 6 to 24 months.
In establishing estimated lives for merchandise in service, management considers
historical experience and the intended use of the merchandise. Material
differences may result in the amount and timing of operating profit for any
period if management makes different judgments or utilizes different estimates.
13
Insurance
The Company self-insures for certain obligations related to health, workers'
compensation, vehicles and general liability programs. The Company also
purchases stop-loss insurance policies to protect it from catastrophic losses.
Judgments and estimates are used in determining the potential value associated
with reported claims and for losses that have occurred, but have not been
reported. The Company's estimates consider historical claim experience and other
factors. The Company's liabilities are based on estimates, and, while the
Company believes that the accrual for loss is adequate, the ultimate liability
may be in excess of or less than the amounts recorded. Changes in claim
experience, the Company's ability to settle claims or other estimates and
judgments used by management could have a material impact on the amount and
timing of expense for any period.
Environmental and Other Contingencies
The Company is subject to legal proceedings and claims arising from the conduct
of their business operations, including environmental matters, personal injury,
customer contract matters, employment claims. Accounting principles generally
accepted in the United States require that a liability for contingencies be
recorded when it is probable that a liability has occurred and the amount of the
liability can be reasonably estimated. Significant judgment is required to
determine the existence of a liability, as well as the amount to be recorded.
The Company regularly consults with attorneys and outside consultants to ensure
that all of the relevant facts and circumstances are considered, before a
contingent liability is recorded. The Company records accruals for environmental
and other contingencies based on enacted laws, regulatory orders or decrees, the
Company's estimates of costs, insurance proceeds, participation by other parties
and the timing of payments, and the input of outside consultants and attorneys.
The estimated liability for environmental contingencies has been discounted
using credit-adjusted risk-free rates of interest that range from approximately
4.0% to 5.0% over periods ranging from fifteen to thirty years. The estimated
current costs, net of legal settlements with insurance carriers, have been
adjusted for the estimated impact of inflation at 3% per year. Changes in
enacted laws, regulatory orders or decrees, management's estimates of costs,
insurance proceeds, participation by other parties and the timing of payments,
and the input of outside consultants and attorneys could have a material impact
on the amounts recorded for environmental and other contingent liabilities.
Income Taxes
The Company's policy of accounting for income taxes is in accordance with SFAS
No. 109 - "Accounting for Income Taxes". Deferred income taxes are provided for
temporary differences between amounts recognized for income tax and financial
reporting purposes at currently enacted tax rates. The Company computes income
tax expense by jurisdiction based on its operations in each jurisdiction.
The Company is periodically reviewed by domestic and foreign tax authorities
regarding the amount of taxes due. These reviews include questions regarding the
timing and amount of deductions and the allocation of income among various tax
jurisdictions. In evaluating the exposure associated with various filing
positions, the Company records estimated reserves for probable exposures, in
accordance with SFAS No. 5 - "Accounting for Contingencies". Based on the
Company's evaluation of current tax positions, the Company believes it has
appropriately accrued for probable exposures.
Asset Retirement Obligations
Effective September 1, 2002, the Company adopted the provisions of SFAS No. 143,
"Accounting for Asset Retirement Obligations." SFAS No. 143 generally applies to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and/or the normal
operation of a long-lived asset. Under the new accounting method, the Company
now recognizes asset retirement obligations in the period in which they are
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. The Company will depreciate, on a straight-line basis, the
amount added to property and equipment and recognize accretion expense in
connection with the discounted liability over the various remaining lives which
range from approximately one to thirty years.
The estimated liability has been based on historical experience in
decommissioning nuclear laundry facilities, estimated useful lives of the
underlying assets, external vendor estimates as to the cost to decommission
these assets in the future and federal and state regulatory requirements. The
estimated current costs have been adjusted for the estimated impact of inflation
at 3% per year. The liability has been discounted using credit-adjusted
risk-free rates that range from approximately 3.00% - 7.25% over one to thirty
years. Revisions to the liability could occur due to changes in the Company's
estimated useful lives of the underlying assets, estimated dates of
decommissioning, changes in decommissioning costs, changes in federal or state
regulatory guidance on the decommissioning of such facilities, or other changes
in estimates. Changes due to revised estimates will be recognized by increasing
or decreasing the carrying amount of the liability and the carrying amount of
the related long-lived asset.
14
Results of Operations
The percentage relationships to revenues of certain income and expense items for
the twenty-six week periods and thirteen week periods ended February 28, 2004
and March 1, 2003, respectively, and the percentage changes in these income and
expense items between periods are presented in the following table:
Percentage Percentage
Change Change
Twenty-six Twenty-six Thirteen Thirteen Twenty-six Thirteen
weeks ended weeks ended weeks ended weeks ended weeks weeks
February 28, March 1, February 28, March 1, FY2004 vs. FY2004 vs.
2004 2003 2004 2003 FY2003 FY2003
------------ ----------- ------------ ----------- ----------- -----------
Revenues $ 358,305 $ 295,604 $ 177,407 $146,425 21.2% 21.2%
--------- --------- ---------- -------- -------- --------
Costs and expenses:
Operating costs 64.4% 64.7% 65.2% 67.2% 20.7% 17.5%
Selling and administrative
expenses 20.6% 21.5% 20.9% 21.6% 16.2% 17.0%
Depreciation and
amortization 6.3% 6.7% 6.6% 6.7% 15.4% 19.3%
--------- --------- ---------- -------- -------- --------
91.3% 92.9% 92.7% 95.5% 19.3% 17.5%
--------- --------- ---------- -------- -------- --------
Income from operations 8.7% 7.1% 7.3% 4.5% 45.7% 98.8%
--------- --------- ---------- -------- -------- --------
Other expense (income): 1.3% 0.3% 1.3% 0.3% 371.8% 487.2%
--------- --------- ---------- -------- -------- --------
Income before income taxes 7.4% 6.8% 6.0% 4.2% 29.6% 74.6%
Provision for income taxes 2.8% 2.6% 2.3% 1.6% 29.5% 74.6%
--------- --------- ---------- -------- -------- --------
Income before cumulative
effect of accounting change 4.6% 4.2% 3.7% 2.6% 29.6% 74.7%
--------- --------- ---------- -------- -------- --------
Cumulative effect of
accounting change 0.0% 0.8% 0.0% 0.0% -100.0% 0.0%
--------- --------- ---------- -------- -------- --------
Net income 4.6% 3.4% 3.7% 2.6% 58.0% 74.7%
========= ========= ========== ======== ======== ========
15
Twenty-Six Weeks ended February 28, 2004 Compared with Twenty-Six Weeks Ended
March 1, 2003
Revenues. Revenues increased 21.2 % to $358.3 million in the twenty-six weeks
ended February 28, 2004 as compared with $295.6 million for the twenty-six weeks
ended March 1, 2003. This increase can be attributed to acquisitions (15.3%),
primarily Textilease , growth from existing operations and price increases in
the core uniform rental business (5.6%), growth from existing operations in the
first aid business (0.1%), and increased revenue from the UniTech garment
services business (0.2%).
Operating costs. Operating costs increased to $230.8 million for the twenty-six
weeks ended February 28, 2004 as compared with $191.1 million for the twenty-six
weeks ended March 1, 2003. As a percentage of revenues, operating costs
decreased to 64.4% from 64.7% for these periods. The primary driver of this
decrease was lower merchandise costs which were offset in part by significantly
higher energy costs and the fact that the Textilease laundries, acquired in the
first quarter of 2004, generally have higher production costs than the existing
UniFirst facilities.
Selling and administrative expenses. The Company's selling and administrative
expenses increased to $73.9 million, or 20.6% of revenues, for the twenty-six
weeks ended February 28, 2004 as compared with $63.6 million, or 21.5% of
revenues, for the twenty-six weeks ended March 1, 2003. The decrease in selling
and administrative expenses as a percent of revenues is primarily attributable
to the quick closure of Textilease's corporate office as well as relatively
fewer salespersons as a result of combining operations.
Depreciation and amortization. The Company's depreciation and amortization
expense increased to $22.7 million, or 6.3% of revenues, for the twenty-six
weeks ended February 28, 2004, as compared with $19.7 million, or 6.7% of
revenues, for the twenty-six weeks ended March 1, 2003. The increase was
primarily related to the depreciation and amortization on the tangible and
intangible assets acquired from Textilease offset by certain intangible assets
becoming fully amortized during fiscal 2004 and increased depreciation on
capital expenditures to expand and update Company facilities.
Other expense (income). Net other expense (interest expense, interest rate swap
income and interest income) was $4.7 million for the twenty-six weeks ended
February 28, 2004 as compared with $1.0 million for the twenty-six weeks ended
March 1, 2003. The increase in net other expense was a result of the increased
interest expense, including amortization of deferred financing costs, associated
with debt financing obtained in connection with the acquisition of Textilease,
offset somewhat by an increase in the fair value of the $40,000 SWAP, which was
$0.9 million of income for the twenty-six weeks ended February 28, 2004 as
compared with $0.4 million of income for the twenty-six weeks ended March 1,
2003.
Provision for Income Taxes. The Company's effective income tax rate was 38.5%
for each of the twenty-six weeks ended February 28, 2004 and the twenty-six
weeks ended March 1, 2003.
Thirteen Weeks Ended February 28, 2004 Compared with Thirteen Weeks Ended March
1, 2003
Revenues. Revenues for the thirteen weeks ended February 28, 2004 increased
$31.0 million or 21.2% to $177.4 million as compared with $146.4 million for the
thirteen weeks ended March 1, 2003. This increase can be attributed to
acquisitions (14.4%), primarily Textilease, growth from existing operations and
price increases in the core uniform rental business (6.2%), growth from existing
operations in the first aid business (0.1%), and increased revenue from the
UniTech garment services business (0.5%).
Operating Costs. Operating costs increased to $115.7 million for the thirteen
weeks ended February 28, 2004 as compared with $98.5 million for the thirteen
weeks ended March 1, 2003. As a percentage of revenues, operating costs
decreased to 65.2% from 67.2% for these periods. The primary driver of this
decrease was lower merchandise costs which were offset in part by significantly
higher energy costs and the fact that Textilease laundries generally have higher
production costs than the existing UniFirst facilities.
Selling and Administrative Expenses. The Company's selling and administrative
expenses increased to $37.0 million, or 20.9% of revenues, for the thirteen
weeks ended February 28, 2004 as compared with $31.7 million, or 21.6% of
revenues, for the thirteen weeks ended March 1, 2003. The decrease as a
percentage of revenues was the result of the closure of Textilease's corporate
office as well as relatively fewer salespersons as a function of the combined
operations.
Depreciation and Amortization. The Company's depreciation and amortization
expense increased to $11.7 million, or 6.6% of revenues, for the thirteen weeks
ended February 28, 2004 as compared with $9.8 million, or 6.7% of revenues, for
the thirteen weeks ended March 1, 2003. The increase was primarily related to
the depreciation and amortization on the tangible and intangible assets acquired
from Textilease offset by certain intangible assets becoming fully amortized
during fiscal 2004 and increased depreciation on capital expenditures to expand
and update Company facilities.
16
Other expense (income). Net other expense (interest expense, interest rate swap
income and interest income) was $2.2 million for the thirteen weeks ended
February 28, 2004 as compared with $0.4 million for the thirteen weeks ended
March 1, 2003. The increase in net other expense was primarily a result of the
increased interest expense, including amortization of deferred financing costs,
associated with debt financing obtained in connection with the acquisition of
Textilease.
Provision for Income Taxes. The Company's effective income tax rate was 38.5%
for each of the thirteen weeks ended February 28, 2004 and the thirteen weeks
ended March 1, 2003.
Liquidity and Capital Resources
General. For the twenty-six week period ended February 28, 2004, the Company
had a net increase in cash and cash equivalents of $6.6 million. The Company
completed the twenty-six week period with cash and cash equivalents of $12.7
million and working capital of $79.5 million. The Company believes that current
cash and cash equivalent balances, cash generated from operations and amounts
available under the Company's bank line of credit will be sufficient to meet the
Company's anticipated working capital and capital expenditure requirements for
at least the next 12 months.
Sources and Uses of Cash. During the twenty-six week period ended February 28,
2004, the Company generated cash primarily from two sources: operating
activities and proceeds from the increase in debt. The Company's operating
activities provided net cash of $43.9 million, resulting primarily from net
income of $16.1 million, amounts charged for depreciation and amortization of
$22.7 million, and a net decrease in rental merchandise in service of $7.2
million. Net cash provided by operating activities was used primarily to fund
$15.7 million in capital expenditures to expand and update Company facilities,
reduce outstanding debt by $14.7 million, to pay deferred financing costs of
$3.4 million, fund the acquisition of two businesses for an aggregate purchase
price of approximately $3.3 million and pay approximately $1.3 million in cash
dividends to Common and Class B Common shareholders. The proceeds from the
increase in debt of approximately $176.6 million in the twenty-six weeks ended
February 28, 2004, was used primarily to complete the acquisition of Textilease.
Additional Cash Resources. In connection with the purchase of Textilease, the
Company entered into a new $285 million unsecured revolving credit agreement
("Credit Agreement"), with a syndicate of banks. The Credit Agreement replaces
the Company's previous $125 million unsecured revolving credit agreement and is
due on the third anniversary of the Closing Date (September 2, 2006).
Availability of credit requires compliance with financial and other covenants,
including maximum funded debt, minimum debt coverage, and minimum tangible net
worth, as defined in the Credit Agreement. Compliance with these financial
covenants is generally tested on a fiscal quarterly basis. As of February 28,
2004, the Company was in compliance with our covenants under the Credit
Agreement.
As of February 28, 2004, the Company had $33.9 million available under its
Credit Agreement, net of outstanding borrowings of $230.0 million and standby
irrevocable bank commercial letters of credit of $21.1 million
As part of the Company's business, the Company regularly evaluates opportunities
to acquire other garment service companies. In recent years, the Company has
typically paid for acquisitions with cash and may continue to do so in the
future. To pay for an acquisition, the Company may use cash on hand, cash
generated from operations or borrowings under the Company's Credit Agreement, or
the Company may pursue other forms of debt financing. The Company's ability to
secure short-term and long-term debt financing in the future will depend on
several factors, including the Company's future profitability, the levels of
debt and equity and the overall credit and equity market environments.
Shareholders' equity at February 28, 2004 was $351.4 million, or 60% of the
Company's total capitalization.
17
Seasonality
Historically, the Company's revenues and operating results have varied from
quarter to quarter and are expected to continue to fluctuate in the future.
These fluctuations have been due to a number of factors, including: general
economic conditions in the Company's markets; the timing of acquisitions and of
commencing start-up operations and related costs; the effectiveness of
integrating acquired businesses and start-up operations; the timing of nuclear
plant outages; capital expenditures; seasonal rental and purchasing patterns of
the Company's customers; and price changes in response to competitive factors.
In addition, the Company's operating results historically have been lower during
the second and fourth fiscal quarters than during the other quarters of the
fiscal year. The operating results for any historical quarter are not
necessarily indicative of the results to be expected for an entire fiscal year
or any other interim periods.
Effects of Inflation
Inflation has had the effect of increasing the reported amounts of the Company's
revenues and costs. The Company uses the last-in, first-out (LIFO) method to
value a significant portion of inventories. This method tends to reduce the
amount of income due to inflation included in the Company's results of
operations. The Company believes that, through increases in its prices and
productivity improvements, it has been able to recover increases in costs and
expenses attributable to inflation. To date, inflation has not had a material
impact on our financial results. There can be no assurance, however, that
inflation will not adversely affect our financial results in the future.
SAFE HARBOR FOR FORWARD LOOKING STATEMENTS
Forward looking statements contained in this quarterly report are subject to the
safe harbor created by the Private Securities Litigation Reform Act of 1995 and
are highly dependent upon a variety of important factors that could cause actual
results to differ materially from those reflected in such forward looking
statements. Such factors include uncertainties regarding the Company's ability
to consummate and successfully integrate acquired businesses, uncertainties
regarding any existing or newly-discovered expenses and liabilities related to
environmental compliance and remediation, the Company's ability to compete
successfully without any significant degradation in its margin rates, seasonal
fluctuations in business levels, uncertainties regarding the price levels of
natural gas, electricity, fuel, and labor, the impact of negative economic
conditions on the Company's customers and such customer's workforce, the
continuing increase in domestic healthcare costs, demand and prices for the
Company's products and services, the impact of interest rate variability upon
the Company's interest rate swap arrangements, additional professional and
internal costs necessary for compliance with recent and proposed future changes
in Securities and Exchange Commission (including the Sarbanes-Oxley Act of
2002), New York Stock Exchange, and accounting rules, strikes and unemployment
levels, the Company's efforts to evaluate and potentially reduce internal costs,
economic and other developments associated with the war on terrorism and its
impact on the economy and general economic conditions. When used in this
quarterly report, the words "intend," "anticipate," "believe," "estimate," and
"expect" and similar expressions as they relate to the Company are included to
identify such forward looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Risk
Management has determined that all of the Company's foreign subsidiaries operate
primarily in local currencies that represent the functional currencies of the
subsidiaries. All assets and liabilities of foreign subsidiaries are translated
into U.S. dollars using the exchange rate prevailing at the balance sheet date,
while income and expense accounts are translated at average exchange rates
during the year. As such, the Company's operating results are affected by
fluctuations in the value of the U.S. dollar as compared to currencies in
foreign countries, as a result of the Company's transactions in these foreign
markets. The Company does not operate a hedging program to mitigate the effect
of a significant rapid change in the value of the Canadian Dollar, Euro or
Mexican Peso as compared to the U.S. dollar. If such a change did occur, the
Company would have to take into account a currency exchange gain or loss in the
amount of the change in the U.S. dollar denominated balance of the amounts
outstanding at the time of such change. While the Company does not believe such
a gain or loss is likely, and would not likely be material, there can be no
assurance that such a loss would not have an adverse material effect on the
Company's results of operations or financial condition.
18
Interest Rate Risk
The Company is exposed to market risk from changes in interest rates which may
adversely affect its financial position, results of operations and cash flows.
In seeking to minimize the risks from interest rate fluctuations, the Company
manages exposures through its regular operating and financing activities. The
Company is exposed to interest rate risk primarily through its borrowings under
its $285 million unsecured line of credit with a syndicate of banks. Under the
line of credit, the Company may borrow funds at variable interest rates based on
the Eurodollar rate or the bank's money market rate, as selected by the Company.
As of February 28, 2004, the Company's outstanding debt approximates its
carrying value.
The Company has entered into a $40 million interest rate swap agreement to
manage its exposure to movements in interest rates on its variable rate debt.
The swap agreement is a cash flow hedge and is used to manage exposure to
interest rate movement by effectively changing the variable rate to a fixed
rate. Such instruments are matched with the underlying borrowings. The effective
portion of the cash flow hedge is recorded within the other comprehensive loss
section of shareholders' equity in the period of change in fair value. The
ineffective portion of the cash flow hedge is charged to the Company's
consolidated statement of income in the period of change in fair value.
The Company is evaluating alternatives to manage its exposure to movements in
interest rates on its variable rate debt related to the Credit Agreement.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. As required by Rule 13a-15 under the
Securities Exchange Act of 1934 (the "Exchange Act"), the Company carried out an
evaluation under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of the end of the period covered by this
report. Based upon their evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective to ensure that material information relating to the
Company required to be disclosed by us in reports we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms. In
designing and evaluating the disclosure controls and procedures, the Company's
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurances of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in designing and evaluating the controls and procedures. The Company
currently is in the process of further reviewing and documenting its disclosure
controls and procedures, and its internal control over financial reporting, and
may from time to time make changes aimed at enhancing their effectiveness and to
ensure that our systems evolve with our business.
Changes in Internal Control Over Financial Reporting. There were no changes in
our internal control over financial reporting during the second quarter of
fiscal year 2004 that have materially affected, or that are reasonably likely to
materially affect our internal controls over financial reporting.
19
Part II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders:
The Company's Annual Meeting of Shareholders was held on January 13, 2004.
Phillip L. Cohen and Cynthia Croatti were reelected to the Board of Directors
and an Amendment was approved for the Company's Amended 1996 Stock Incentive
Plan (the "Amendment"). With respect to Mr. Cohen, 7,732,767 shares of Common
Stock were voted for his election and 416,429 shares of Common Stock were
withheld from voting for his election. With respect to Ms. Croatti, 7,337,279
shares of Common Stock and 10,171,464 shares of Class B Common Stock were voted
for her election and 811,917 of Common Stock and no shares of Class B Common
Stock were withheld from voting for her election. With respect to the Amendment,
2,701,312 shares of Common Stock and 10,171,464 shares of Class B Common Stock
were voted for approval, 4,527,195 shares of Common Stock and no shares of Class
B Common Stock were voted against approval and 28,019 shares of Common Stock and
no shares of Class B Common Stock abstained. The terms to office of Mr. Ronald
D. Croatti, Mr. Donald J. Evans, Mr. Albert Cohen and Mr. Anthony DiFillippo
continued after the Annual Meeting of Shareholders.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
* 31.1 Rule 13a-14(a)/15d-14(a) certification of Ronald D. Croatti
* 31.2 Rule 13a-14(a)/15d-14(a) certification of John B. Bartlett
** 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes Oxley Act of 2002
** 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes
Oxley Act of 2002
* Filed herewith
** Furnished herewith
(b) Reports on Form 8-K:
On December 22, 2003, the Company filed an amended Current Report on Form 8-K/A
to report information pursuant to Item 2. Acquisition or Disposition of Assets
in connection with the Company's completion on September 2, 2003 of its
acquisition of the business and assets of Textilease Corporation. The Company
attached as Exhibit 2.1 to the Current Report a Stock Purchase Agreement, dated
as of July 17, 2003, by and among UniFirst Corporation and all of the
stockholders of Textilease Corporation. The Company attached as Exhibit 23.1 to
the Current Report a Consent of PricewaterhouseCoopers LLP. The Company attached
as Exhibit 99.1 to the Current Report a Press release of the Registrant dated
September 2, 2003. The Company attached as Exhibit 99.2 to the Current Report
the financial statements of Textilease Corporation. The Company attached as
Exhibit 99.3 to the Current Report the pro forma combined condensed financial
information.
On January 12, 2004, the Company furnished a Current Report on Form 8-K to
report information pursuant to Item 12 - Results of Operations and Financial
Conditions. The Company attached as Exhibit 99.1 to the Current Report the
Company's press release announcing first quarter fiscal 2004 financial results.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
UniFirst Corporation
April 13, 2004 By: /s/ Ronald D. Croatti
-------------------------
Ronald D. Croatti
President and Chief Executive Officer
UniFirst Corporation
April 13, 2004 By: /s/ John B. Bartlett
----------------------
John B. Bartlett
Senior Vice President and Chief Financial Officer
21
EXHIBIT INDEX
DESCRIPTION
* 31.1 Rule 13a-14(a)/15d-14(a) certification of Ronald D. Croatti
* 31.2 Rule 13a-14(a)/15d-14(a) certification of John B. Bartlett
** 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of
2002
** 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of
2002
* Filed herewith
** Furnished herewith
22